Capacity Markets Key in Fed/State Regulator Meeting

What mechanism?a properly developed capacity market, and/or long-term contracts or elimination of capacity payments accompanied by higher energy payments?will lure much-needed investments into the state?s energy infrastructure in time to avert a supply crunch was the subject of a June 2 joint federal and state energy agency meeting. The need for more demand-response programs to boost reliability was also mentioned, but it received far less attention. The looming summer supply squeeze, along with feedback from the California Public Utilities Commission?s resource-adequacy workshops, has placed a capacity market on front and center stage. The complexity involved in creating a capacity market to meet the state?s 15 to 17 percent supply reserve requirement, however, continues to impede progress ( Circuit , May 27, 2005). In spite of the slowdown, many insist a capacity market is key to a viable market in the short term. ?We have to have a capacity product, auction, and obligation,? said Jim Detmers, California Independent System Operator vice-president of grid operations. The urgency of overhauling the state?s market was highlighted by the huge cost of transmission congestion. The cost of overloaded power lines within CAISO territory is $1 billion a year, said Yakout Mansour, the grid operator?s chief executive officer. He said the escalating congestion costs could be lowered by a capacity market operated by CAISO. Reaching consensus on the matter by fall is critical, he added. More than half of the $1 billion dollar congestion tab was attributed to reliability-must-run contracts. ?It is not a sustainable solution,? Mansour said. Those contracts keep less efficient power plants on call for the grid operator. The contracts are considered more expensive than having the same power bid in a market, such as a capacity market. There was wide agreement that reliability-must-run contracts are skewing the market and thwarting the development of new supplies. ?There is no incentive for the load-serving entities to purchase capacity,? said Steve Schleimer, Calpine vice-president of market and regulatory affairs. Many want reliability-must-run contracts voided next year when resource-adequacy mandates go into effect. Consumer advocate Mike Florio, however, said reliability-must-run agreements should not be phased out until the dust from a new market has settled. CPUC consultant Steve Soft said a big part of the state?s market problems is that fixed costs of peaking units are not recovered. The underpayment, which he estimated at $3.6 billion, impeded the sending of proper price signals. ?I love markets, but they can?t do magic,? he said. The problem, Soft said, was that the utilities do not want to pay the full price of energy suppliers. He pitched redesigning the market so it eliminates capacity payments but boosts the amount paid for energy. An essential element would be penalties for nondelivery, he said, adding that the change could yield about a half a billion dollars a year in savings.

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Capacity Markets Key in Fed/State Regulator Meeting

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